Ecuador: Crossroad: Competition And IP

Whereas intellectual property laws protect the investment,
effort and ingenuity in a specific creation of the intellect by
giving an exclusive right to benefit from it, thus excluding others
(even actual or potential competitors), competition policy and laws
aim at increasing welfare by promoting vigorous competition and
limiting exclusionary practices.

This creates a tension, although now it is generally accepted
that both legal regimes do in fact spur innovation that ensures a
healthy competition and foster new technologies, products and
services at lower prices.

However, the need to navigate through these two very different
legal regimes does raise some concerns about the potential
conflict, particularly in a jurisdiction like Ecuador where the
current formulations of both are relatively new. We offer in
this article a glance at the crossroad between intellectual
property law and competition law.

Laws for competition and IP

The Ley Orgánica para la Regulación y Control
del Poder de Mercado (Law for Regulation and Control of Market
Power, "LORCPM") is the main legal statute
in Ecuador regarding protection and promotion of competition (also
known as antitrust in several jurisdictions). LORCPM prohibits
abuse of market power (akin to dominant position in some
jurisdictions), anticompetitive agreements and unfair competition,
and establishes the Superintendencia de Control del Poder de
Mercado (Superintendence for Control of Market Power,
"SCPM") as the supervising agency that
investigates and imposes penalties for violations under LORCPM.

Intellectual property ("IP") is regulated by
the recently enacted Código Orgánico de la
Economía Social de los Conocimientos, Creatividad e
Innovación, also known as Código
Ingenios (Organic Code of the Social Economy of Knowledges,
Creativity and Innovation, also known as Ingenuity Code, the
"IP Code"), which replaced the Intellectual
Property Act of 2006 and confirmed the Instituto Ecuatoriano de
Propiedad Intelectual (Ecuadorian Institute for Intellectual
Property, "IEPI") as the supervising agency that
regulates and controls IP in Ecuador. However, Decision
486 of the Andean Community ("Decision 486")
establishes the legal framework for IP in the countries that are
members of the Andean Community (comprised of Bolivia, Colombia,
Ecuador and Peru).

LORCPM contains specific provisions regarding the abuse of
intellectual property rights ("IPR") as an abuse
of market power; it is unclear if SCPM will require a prior
determination by IEPI of abuse of IPR to conclude that there is an
abuse of market power pursuant to LORCPM, or the burden to
establish itself that a use of IPR constitutes an abuse that
violates LORCPM. In general, it seems that doctrine and
international precedents may help define the burden.

LORCPM also establishes that use of IPR may constitute unfair
competition when it affects economic efficiency, consumers, general
welfare or competition in the marketplace.

Decision 486 contains several provisions referring to unfair
competition related to IP, mostly as acts to generate confusion,
misappropriation of trade secrets and false statements regarding
the quality or characteristics of products.

In addition, the IP Code contains some provisions regarding the
grant of compulsory licences as a remedy for anticompetitive
practices and also stressing that the exercise of IPRs must not
unlawfully restrict competition.

Investigations by the Competition Authority with a strong IP
component

Most of the antitrust cases involving IP that have been filed
before SCPM are regarding unfair competition, and many of them have
been dismissed on the grounds that there is not sufficient evidence
of potential violation of LORCPM and involve exclusively IP
law.

A reduced amount of cases involving IP are investigated for
alleged abuse of market power, and to the best of our knowledge
there has not been a single investigation for alleged
anticompetitive agreement involving IP.

Although SCPM has not directly addressed the issue of IP and
competition, it has been very active investigating the
pharmaceutical sector which relies heavily on IP protection. The
final outcome of these investigations will allow a better
assessment of standards applied by SCPM in regard to IP rights and
competition law, and in the event of judicial review of the
decisions, how much will judges be willing to accept those
standards or impose different ones.

The IP Code aims at promoting wider dissemination of IP
(although perhaps at the expense of reducing protection to IP
owners), and also seeks to enhance competition by promoting
cross-licensing, compulsory licensing and other measures that would
limit exclusionary enforcement of IP.

Anticompetitive IP conducts

Any limitation on trading imposed by a licensing agreement could
be considered an anticompetitive limitation either as an abuse of
market power or an anticompetitive agreement, if unjustified from a
perspective of economic efficiency or welfare; for the first case a
determination of actual market power would be required, whereas for
the latter the agreement imposing the limitation may be
sufficient.

It is important to take into consideration that the simple
exercise of an IP right is far from being an infringement of the
LORCPM; a test should be applied to determine if the exercise of
this right produces an anticompetitive effect, such as facilitating
price fixing (an anticompetitive practice per se),
foreclosing access to an important input, reducing output or
dividing the market among undertakings that would otherwise have
competed. The relevant test is therefore if the restraints in a
licensing agreement would be anticompetitive or affect the general
welfare or that of consumers.

i Refusals to license

Under LORCPM, refusals to license could be considered under the
broader category of refusals to deal or supply. Either as an abuse
of market power or as an anticompetitive agreement, refusals to
deal or supply are considered an infringement to LORCPM if they are
deemed unjustifiable from a competition perspective. To date there
has not been a case where the limits between justifiable and
unjustifiable refusals to deal or supply have been established,
although such a violation has been alleged (regarding precisely IP
rights) but the allegation was considered baseless as the IP owner
did offer a licence on fair, reasonable and non-discriminatory
terms whereas the claimant insisted on its own terms.

A refusal to license, if the IP content or supply is deemed
"must have" in order to compete, could result in an
exclusionary effect that would more likely be found to be in
violation of LORCPM.

ii Unfair and discriminatory licensing

Just like refusals to license, any unfair (i.e., exploitative)
and discriminatory licensing could be in violation of LORCPM
if it puts third parties on equivalent transactions in an
uneven position in a market downstream.

iii Standard-Essential Patents

In general terms, all actions to obtain an increased revenue or
advantage by one undertaking that is dominant in a relevant market
("unjustified extraction of consumer surplus"),
whether they involve an IP right or not, could result in liability
for abuse of dominance under LORCPM.

In particular, LORCPM addresses the misuse or abuse of
intellectual property rights as a separate, specific
violation.

The main national standard-setting organisation is a public
agency (INEN) that does take into account the recommendations of
the industry, and therefore may decline to include in a standard a
patent held by one undertaking that would be detrimental to others,
although there is no requirement or precedent for demanding
licensing of Standard-Essential Patents by INEN. These standards
are voluntary unless referenced in technical regulation, which is
mandatory (a mandatory nature would not exempt from compliance with
LORCPM so this would not be available as an effective defence).

Owning an SEP does not automatically result in dominance in the
relevant market pursuant to the law, statutes or (limited) case law
in Ecuador. However, it could be alleged that the owner of the SEP
is in the position to impose entry-barriers and to limit access to
technology, and that there are no acceptable substitutes (precisely
due to the fact that it is an SEP), which are some of the criteria
to determine dominance.

The owner of an SEP may seek injunctive relief, and once
infringement is proven, it should ordinarily be granted unless
there is an overriding public interest; an obligation to license
under FRAND terms is not a viable defence at this stage.

Any potential violation of antitrust provisions in the LORCPM
should be brought in a separate claim that would be initially
adjudicated administratively by the SCPM, whose decision is subject
to judicial review. Unfortunately, there is no established
policy or concurring precedents to determine whether seeking an
injunction by the owner of an SEP would incur a violation of
antitrust law.

Licensing under fair, reasonable and non-discriminatory (FRAND)
terms of an SEP is not mandatory nor ruled out by Ecuadorian law.
Private standard-setting organisations may contractually demand
licensing under FRAND terms, although an agreement to regulate
quality, when not pursuant to a national or international standard,
may also be a violation of antitrust regulations (Article 11.10 of
the LORCPM).

However, unjustified refusal to deal (i.e., to license an IP
right), demanding exploitative prices (i.e., outsized royalties) or
establishing different conditions for similar considerations (i.e.,
discriminating) are violations of antitrust provisions pursuant to
the LORCPM, and would apply to the owner of the SEP if deemed to be
dominant in the relevant market, or if it is the result of an
agreement with other undertakings.

iv Anticompetitive or exclusionary
royalties

There are general provisions that prohibit 'exploitative
prices', 'exploitative practices', 'exclusionary
practices', and the abuse of IP rights that may be invoked
against anticompetitive or exclusionary royalties regarding any IP
right, but little guidance as to how and when a price (i.e.
royalty) may be deemed exploitative, or a 'safe harbour' or
threshold for prices to be established without concern.

v Other Abuses

v.a) Sham or vexatious IP litigation

Vexatious litigation regarding IP rights can be considered a
violation of the LORCPM both as an abuse of IP rights (Article
9.17) or the abuse of legal proceedings that limit the access or
permanence in the market of competitors (Article 9.18), if the
claimant enjoys dominance ('market power') in the relevant
market.

Furthermore, sham or vexatious IP litigation could also be
considered an unfair practice that also violates antitrust law
because it constitutes an abuse of the legal or administrative
proceedings to prevail in the market (Article 27.9 of the
LORCPM).

v.b) Anticompetitive settlements of IP disputes

There are no special provisions regarding settlement agreements
terminating an IP infringement dispute; consequently, any
settlement agreement would be reviewed under the general provisions
of the LORCPM, especially if the IP owner has dominance in the
relevant market.

Any settlement agreement of IP disputes that limits market entry
(i.e., generic producers in the pharmaceutical sector) could
violate LORCPM as it may be deemed to constitute incitement to
refuse selling or delivering goods (Article 9.10), the conditioning
of acts or agreements to acceptance of terms that according to
their nature or commercial use are not related thereto (Article
9.13), an exclusionary practice (Article 9.15), abuse of an IP
right (Article 9.17), unjustified implementation of legal actions
that result in restricting access to the market of actual or
potential competitors (Article 9.18), or finally preventing or
impairing market access to actual or potential competitors for
reasons other than economic efficiency (Article 9.22).

Furthermore, even if the owner of IP rights does not enjoy
dominance, the settlement agreement could breach LORCPM if it
imposes entry barriers (Article 11.18) or prevents or impairs
market access to actual or potential competitors for reasons other
than economic efficiency (Article 11.20).

Conclusions

There are few cases with final rulings that address the
crossroad between the IP Code and LORCPM. Therefore, doctrine and
international case law has continued to be used as a reference both
by the authority and private parties, to help better understand the
interplay, and we would recommend careful analysis of the risks
involved with aggressive IP measures, to ensure that it does not
run afoul of competition law (LORCPM).

The promotion and protection of generic drugs will continue to
be an important focus of SCPM, which has warned patent or brand
drugs owners to refrain from using their IP rights in order to stop
or delay the entrance of generic drugs.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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